My wife and I have a tremendous amount of debt. We make a lot of money by most standards, and that makes bankruptcy virtually impossible. Our credit card debt alone is more than 50% of our yearly income ($130,000 in credit card debt, plus $60K in student loans, plus $370K in mortgage debt, on $240K of yearly income).
To date, we haven’t been late on any bills, but we’re now robbing Peter to pay Paul, so it’s inevitable. We’ve budgeted to the bare minimum, but the interest has caught up with us. We have about $60K in IRAs (not Roths) we’re considering cashing to pay down debt.
There are many articles that advise against cashing IRAs to pay debts and mention it may be necessary in extreme circumstances without elaborating on those circumstances. We realize cashing IRAs won’t take care of all of the debt, but considering our total average interest rate on debt is 20%, it should give us enough breathing room to begin whittling the rest of it away and begin start again contributions to retirement. We also know our credit will be hit hard, but we don’t care at this point, and we feel we have few alternative options.
Should we cash out our IRAs? Without having been late on any payments, are we in a position to try and negotiate settlements with our creditors?
With your income, $60,000 in an IRA is nothing. And once you are done paying taxes and interest you’ll probably only have $40,000 left. That small amount of money isn’t going to be enough to fully settle $130,000 in credit card debt.
The debt settlement game is just that, a promise that all your debt will be eliminated for less than you owe. But the reality is that the vast minority of people never settle all their debt, it will still result in bad credit, and you will have a big potential tax liability.
Besides, there is no guarantee that if you clean out that account that your creditors are going to agree to any settlement. Without an agreement by all before you drain the account you will lose 30% to taxes and penalties, you’ll still be in debt and how has that helped you at all.
And by the way, if you are current on your bills the creditors are not going to give you the time of day on settlement offers. You need to be at least 90 days behind to get any sort of deals from them at all.
I strongly suggest that before you leap to any conclusions that you find a local bankruptcy attorney to go in and visit. You don’t have to go to file, just educate yourself. Ask all the questions you can about your situation and ask for advice on how bankruptcy can assist you.
You’d probably be looking at a Chapter 13 bankruptcy which would give you a monthly debt repayment that would fit within your other obligations. Bankruptcy also gives you legal protection from your creditors, protects your IRA, eliminates your tax liability for forgiven debt and allow you to keep your home.
I can only think of very few situations I’ve run into since 1994 where cashing out retirement funds made any sense at all. This isn’t one of them.
Now I know in advance that you’re probably not going to like the answer I’ve given you, but it is the right one. You sound to me like to are a smart and talented person that has found yourself in a increasing stressful position and you are trying to bargain for an answer that will justify robbing your retirement funds. I can’t do that for you.
If you are worried about your credit after bankruptcy, rebuilding it is ridiculously easy.
See comments on this past question from a bankruptcy attorney that addressed a similar situation.